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Little Achieved on Reforms in Budget 2012

India
19 Mar 2012

The backdrop to this year's Budget was rather harsh from all standards and all eyes were on the finance minister to usher in reforms, tame inflation and the ballooning fiscal deficit to boost economic growth. Managing expectations, the finance minster proposed changes in the Fiscal Responsibility and Budget Management (FRBM) Act, approved guidelines for establishing joint-venture companies by defence PSUs in PPP mode and other initiatives to support the industrial and agriculture sector. He pushed food security proposed a reduction in subsidies and management of other unplanned expenditure of the government with a view to manage fiscal deficit in the coming years.

The much talked about policy reform for domestic capital market were incorporated by simplifying process of IPOs and allowing QFIs to access the Indian bond market. Credit and refinancing support was also extended to PSU banks and Nabard. Infrastructure sector including power, coal, transport, low-cost housing were bestowed preferential treatment throughout the finance minister's speech. Permission to raise working capital loans, lowering with the holding tax rates on interest to 5%,extension of tax holidays for power sector and reduction in customs duties for specified goods are some of the fiscal measures proposed to incentivise these sectors

The Finance Minister spelt out the government's resolve to tackle the issue of black money and corruption and take stringent steps, including prosecuting defaulters. The government anticipates cooperation from foreign countries in securing information on offshore assets held by Indian residents. Tax collection and recovery procedures may also undergo revision to capture cash transactions in the domestic market, particularly transfer of immovable property and sale of bullion and jewellery.

Common man probably worse off
The salaried class who were hit by the reduction in Employee Provident Fund rates on Thursday were offered little respite by the rejig in the income tax slab rates. Simple expectations on increase in tax deductions for housing loans, tax saving instruments and medical reimbursements also did not find their way into the Budget. Some cheer for the senior citizens as they were exempted from payment of advance tax and grant of other benefits. However overall, average disposable income of the common man may not actually increase due to widening of service tax base and hike in consumption tax rates (excise and service tax by 2%) that invariably get passed onto the consumer.

International taxation -- Retrospective and Regressive
Aside from introduction of the Advance Pricing Arrangements, the changes proposed in the field of international taxation, are likely to antagonise foreign investors. The sigh of relief after the Vodafone judgment seems to be temporary as the government has proceeded to make retrospective amendments in the law to tax offshore share transfers that involve Indian assets and/or control or management rights in an Indian company. Other complex issues, which had been adjudicated in favour of the tax payer or were pending consideration of the Supreme Court like taxation of software payments, lease of satellites, use of telecommunication services, have been 'decided' against multinational companies defying internationally accepted tax principles. Companies investing through Mauritius are also targeted as their entitlement to treaty benefits could be questioned. General Anti-Avoidance rules have been brought into the statute despite strong concerns raised by tax payer a on their administration and implementation. More importantly, the Parliamentary standing committee's recommendations do not seem to have been considered. To prolong the agony, withholding tax obligations have been retrospectively cast on non residents, which the Supreme Court viewed as extra-territorial. These changes wifi adversely affect all pending litigation apart from re-creating an environment of tax uncertainty. It is not clear how the finance minister seeks to maintain the interest of the foreign investor in India with such averse signals on international taxation.

Small concessions
Budget 2012 does not propose any change in the corporate tax rate structure, instead, cascading effect of dividend distribution tax in multi-tier structures has been done away with. Some sops have been offered for special sectors like power, cold storage, warehousing to reduce their tax burden. The proposal to reduce Securities Transaction Tax from 0.125% to 0.1% has not appeased the capital markets.

Overall, this year's Budget has achieved little in the area of reforms and it is anybody's guess whether some of the harsh tax proposals get rolled back duet o political and international pressures.

*First published in the Financial Express 19 March 2012

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E. mukesh.butani@bmrlegal.in

 

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